What Qualifies for a Medical IRA Exemption?

Costly medical bills can leave you scrounging for money. If you want to avoid taking out loans or running up charges on your credit card, you can take money out of your IRA. However, any part of your distribution that doesn't qualify for an exception is subject to an extra 10 percent additional tax if withdrawn from your plan before you reach age 591/2.

Qualifying Expenses

The IRA medical exemption uses the same deduction as the medical expenses deduction. These expenses include the medical expenses of your spouse and dependents as well as your own. Costs can be for checkups, tests, treatments or even insurance premiums. It also includes similar dental care and eye doctor expenses. However, you can't include any costs that are reimbursed. For example, if you pay $5,000 for surgery, but your insurance company reimburses you $4,000, you would only be able to include $1,000 in the exemption.

Adjusted Gross Income Threshold

The exception only applies to medical expenses that exceed the adjusted gross income threshold. Through the 2012 tax year, the threshold is 7.5 percent of your adjusted gross income. In future years, the threshold bumps up to 10 percent, further reducing the amount of expenses that will qualify for the exemption. For example, if, in 2013, your AGI is $62,000 and you have $7,000 of qualifying medical expenses, you could only exempt $800 of your IRA distribution.

Permanent Disability Exception

If you suffered a permanent disability, you can avoid the early withdrawal penalty on all of your distributions, not just the medical expenses. To claim a permanent disability, you have to show that you can't engage in any gainful activity because of the disability. In addition, you must have a physician certify that your condition is expected to be permanent or to continue indefinitely. Failure to submit the required documentation can cause the IRS to disallow your exception.


A separate exemption exists for medical insurance premiums while unemployed. Medical insurance premiums include not only your own but also the premiums for your spouse and any dependents. To qualify, you must have lost your job, received unemployment benefits for at least 12 weeks, taken the distributions in the year you received the unemployment benefits or the year after, and received the distributions no more than 60 days after you became reemployed. Unlike the medical expenses exemption, the costs do not have to exceed a set percentage of your AGI.

IRA Exemption Effects

If you do qualify for the medical IRA exemption, or the permanent disability exception, you don't have to pay the 10 percent additional tax penalty on your distribution. However, you're still responsible for the ordinary income taxes on the distribution. When you file your taxes, you have to complete Form 5329. On the form use code "05" for the medical expenses exemption or the code "03" if you are permanently disabled.

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